Inflation in U.S. Highest Since 1981; Fed Not Expected to Raise Rates

Discussion in 'Economics' started by ByLoSellHi, Aug 4, 2008.


    U.S. Spending Rises; Prices Jump the Most Since 1981 (Update2)

    By Bob Willis and Shobhana Chandra

    Aug. 4 (Bloomberg) --
    The biggest increase in prices in almost three decades eroded consumers' buying power in June, diminishing the boost from the government's tax rebates.

    Consumer inflation climbed 0.8 percent, the most since February 1981, the Commerce Department said today in Washington. Spending increased 0.6 percent after a 0.8 percent gain in May.

    The tax rebates from the government's stimulus plan will provide only a temporary boost for Americans in the face of $4- a-gallon gasoline, tumbling home prices and mounting job losses. The Federal Reserve is projected to hold interest rates unchanged tomorrow as the risks of both faster inflation and slower growth mount.

    ``There is a bit more inflation pressure than many people anticipated,'' said Kevin Logan, a senior market economist at Dresdner Kleinwort in New York, who correctly forecast the gain in spending. ``Inflation pressure is more widespread and that has to be some concern for the Fed. The tax cuts have helped maintain spending, but it's likely to drop off pretty dramatically in the fourth quarter.''

    Treasuries fell, pushing yields higher. The benchmark 10- year note yielded 3.97 percent as of 8:57 a.m. in New York, up 3 basis points.

    Economists had forecast spending would rise 0.4 percent, after an originally reported 0.8 percent increase in May, according to the median of 67 estimates in a Bloomberg News survey. Projections ranged from a 0.5 percent decline to a 0.9 percent gain.

    Incomes Increase

    Incomes increased 0.1 percent after jumping 1.8 percent the prior month, today's report showed. The median forecast was a decline of 0.2 percent. About $28 billion in rebates went out in June, compared with about $50 billion in late April and May, according to Treasury Department figures.

    The Fed's preferred gauge of prices, which excludes food and fuel, climbed 0.3 percent, more than forecast, after a 0.2 percent gain the previous month. That compared with a 0.2 percent median estimate in the Bloomberg survey.

    The price measure was up 2.3 percent from June 2007, the biggest year-over-year increase since December.

    Fed's Meeting

    Investors are betting the Fed will hold the benchmark rate unchanged at 2 percent tomorrow, according to federal funds futures contracts. Fed Chairman Ben S. Bernanke on July 15 told lawmakers that the economy faced threats to both growth and inflation.

    Adjusted for inflation, spending decreased 0.2 percent after rising 0.3 percent in May.

    Most economists are forecasting the lift from the rebates will fade in the second half of the year. Retail sales rose 0.1 percent in June, less than forecast, indicating consumers may already have started to hunker down. Purchases of autos and light trucks dropped in July to the lowest level since 1993, industry figures last week showed.

    Economists surveyed by Bloomberg in the first week of July forecast economic growth to slow to 1.4 percent in the third quarter and to 0.5 percent in the fourth quarter.

    The economy shrank at a 0.2 percent race in the last three months of 2007 and grew at about an average 1.5 percent annual pace in the first six months of 2008, government data last week showed.

    With the economy teetering on the brink of a recession, consumers are focusing their purchases on staples while cutting back on luxuries like $4 lattes, causing sales to slump at Starbucks Corp. the world's largest chain of coffee shops.

    Starbucks last week said it will close more U.S. stores than it will open next year after it posted its first loss in 16 years as a public company.

    ``Until the economy significantly improves, we're just trying to do what we can to get through this storm,'' Starbucks Chairman Howard Schultz said on a conference call.
  2. Similar story:

    The overall economy, as measured by the gross domestic product, grew at a 1.9 percent rate in the April-June quarter, more than double the 0.9 percent increase in the January-March quarter.

    Economists believe the $168 billion stimulus program will continue to lift the economy in the current quarter. They predict there will be a significant slowdown in the final three months of this year and early next year, though.

    Some analysts believe GDP will shrink in those two quarters, giving the country back-to-back GDP declines, the traditional definition of a recession.
  3. oriol88


    competitive devaluation
  4. Daal


    if the CPI feed thorugh the gdp price deflator then there is no way gdp will get away this Q
  5. jjf


    Unless the spending figure is inflation adjusted, then consumer spending shrunk a lot more than - 0.2% (0.6 minus 0.8) because the inflation number is synthetic and all less embracing, whereas spending is spending.

    Or have I got it all wrong.
  6. You have it wrong.
  7. The problem, that compounds these already bad numbers, is that the reason consumer spending is up is due to inflationary spikes in basic staples such as produce, meat, gasoline, etc.

    So, any 'increase' in consumer spending can be attributed to the highest inflation since 1981 - and that's if you believe the numbers the government is providing, which most likely understate inflationary increases.
  8. bingo.

    Also, final GDP for 4th Q, 2007 is now negative, not even taking "real" GDP into account. most economists (worthless as a group BTW), now believe 1st and 2nd qtr GDP's will be revised to negative as well, even with the stimulus. regardless of your definition of recession, the economy has definitely been hurting, and its getting worse as measured by jobless claims.
  9. jjf


    Could the BS figures have something to do with an up coming election.

    Or have I got it wrong.
  10. Yes.
    #10     Aug 4, 2008